India’s economic growth could face hurdles soon: UBS

UBS believes the US Federal Reserve will increase rates four times this year, which is 0.25 per cent rise in interest rate in every three months.Biswajit Baruah | ET Bureau | January 13, 2016, 12:53 IST

The US and European economies are likely to see growth this year, while Asian economies may see a moderation, said Paul Donovan, global economist, UBS Investment Bank. In a conference call organised by UBS, he said India’s economic growth may come under pressure in the near term, as agricultural output is expected to remain low due to the impact of El Niño.

Global Economic Outlook

We expect global economic growth somewhere between 3.25–3.50 per cent this year. However, beneath this headline number we see considerable divergence with US and Europe growing at better pace, while Asian and Chinese economies gradually slow down. The US economy is likely to grow at 2.8 per cent driven by consumer spending. We see gradual increase in wages as the labour market in the US is currently tight for skilled and semi-skilled labour, which constitute 70 per cent of US labour market. The story about European economy is positive bank lending, and the fiscal stimulus coming through. We expect moderation of economic activity in the Asian region. China is likely to grow at 6.2 per cent this year and 5.8 per cent next year, we believe China’s long term growth is likely to be around 5.0-5.5 per cent.

We believe the US Federal Reserve will increase rates four times this year, which is 0.25 per cent rise in interest rate in every three months. The Fed fund rates are expected to increase by 1 per cent as a whole by end of this year. The US inflation is likely to increase and we expect the number to be around 1.5–2.0 per cent by the end of this year. We believe the European Central Bank (ECB) will leave policy rates largely unchanged this year.

Chinese Currency View

We believe the Chinese renminbi will weaken against the US dollar by around 5 per cent this year. The currency is likely to weaken more against the reference basket as the euro is expected to strengthen against the US dollar.

Indian Economic Outlook

India’s economic growth may come under pressure in the near term, as agriculture output is expected to remain low due to El Niño impact. India’s model for manufacturing, which is based on China, is not very impressive as globally there is going to be a transformation in the labour force from semi-skilled and skilled to highly skilled labour for manufacturing value-added products.

Equities Will Outperform Bonds

As the US interest rates and inflation are rising, the fixed income markets are likely to remain weak. This makes equity markets as a favourite investment class because of the growth story and the relative valuation in a rising interest rate environment. Equity as global asset class will outperform bonds this year.

Small Businesses Driving Growth

The recovery in global economy is currently led by small business and they have nothing to do with global stock markets. Small business account for 60 per cent of private sector GDP of US and Europe, they account for 70 per cent of employment there. They are driving economic recovery.

Market Reaction to Economic Data

The economic data points are currently being revised more often, and with bigger changes than normally is the case. Markets tend to react on initial data response and not on revisions. It’s hard to explain why there is so much disagreement between the markets and central banks and economists. The economic analysis in financial markets today is not as good as it was 10-15 years ago. I think the quality has declined as economics has become more complicated.

This means financial markets will overreact to disappointing economic data, and there will be several times when the markets and the economists will move in different directions. Of course, the economist will always be right and the markets will be wrong and there will long period of disagreements between them.

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In 2018, automobile demand remained robust despite the slowdown overcast in the last three months of year. All segments reported strong double-digit growth in the calendar year ending December 31 except passenger vehicles which reported a growth of 5 per cent. Three-wheelers sales grew fastest followed by commercial vehicles, two-wheelers, and passenger vehicles. The overall automobile sales crossed 26.7 million units for the first time.

In 2018, automobile demand remained robust despite the slowdown overcast in the last three months of year. All segments reported strong double-digit growth in the calendar year ending December 31 except passenger vehicles which reported a growth of 5 per cent. Three-wheelers sales grew fastest followed by commercial vehicles, two-wheelers, and passenger vehicles. The overall automobile sales crossed 26.7 million units for the first time.